Chinese spot thermal coal prices to remain weak near term: Macquarie

Singapore (Platts)--20Jun2012

Chinese spot thermal coal prices are expected to remain depressed moving into the summer, given high stockpiles and relatively weak demand for coal-fired power generation, Macquarie Research said Wednesday.

"Low prices are expected to continue for the next three months and then a significant supply cut is expected," analyst Matty Zhao said by phone.

With domestic production rising year-on-year in China and excessive stockpiles at Chinese power companies, coal cargoes are getting sold at "ridiculously" low prices amid oversupply, she said.

Coal inventories in the US have nearly doubled to 190 million mt in May and June, compared with 100 million mt last year, the analyst said.

Macquarie cut its China thermal coal spot price estimates for Qinhuangdao 5,500 kcal/kg NAR material by 7-8% to Yuan 765/mt in 2012 ($121/mt) and Yuan 800/mt in 2013 including VAT, and lowered its 2012 seaborne price estimate for FOB Richards Bay 6,000 kcal/kg NAR to $97/mt from $105/mt.

"Coal inventory at major power plants is at a similar level to 2008 at 27-28 days. While stocks at IPPs [independent power producers] are as high as they have ever been, we don't think it's a situation that can be rectified quickly," Zhao said in a research note.

The analyst estimated that it would take three months for destocking.

She expects coal-fired power generation growth to be -2% in the second quarter and 4% in the third quarter due to both weak power demand and strong hydro power.

Macquarie cut its estimate for China's coal-fired power generation growth rate to 4.7% from 9.3% for 2012.

"We are cautious on near-term coal prices and see the potential for a drop below Yuan 700/mt [for 5,500 kcal/kg NAR]," Zhao said. "But we retain a positive medium-term view on an anticipated demand rebound in the fourth quarter, railway bottlenecks and signs of supply cuts in Shanxi."

China's spot thermal coal prices should pick up in the fourth quarter on the back of winter restocking and would remain strong in 2013, she said.

The coal-fired power generation growth rate is expected to bounce back to 10% year-on-year in the fourth quarter on the back of a reduction in hydro power and strong winter demand, the analyst said.

She said she still sees China coal imports at 198 million mt for 2012, of which 138 million mt would be thermal coal.

Of China's total thermal coal imports, more than half would come from Indonesia while the rest would come from Australia, South Africa and US/Colombia, she added.

--Deepak Kannan,
--Edited by Alisdair Bowles